Transport Costs
Authors: Dr. Jean-Paul Rodrigue and Dr. Theo Notteboom
1. Transport Costs and Rates
Transport systems face requirements to increase their capacity
and to reduce the costs of movements. All users (e.g. individuals,
enterprises, institutions, governments, etc.) have to
negotiate or bid for the transfer of goods, people,
information and capital because supplies, distribution systems,
tariffs, salaries, locations, marketing techniques as well
as fuel costs are changing constantly. There are also costs
involved in gathering information, negotiating, and enforcing
contracts and transactions, which are often referred as
the cost of doing business. Trade involves transactions
costs that all agents attempt to reduce since transaction
costs account for a growing share of the resources consumed
by the economy.
Frequently, enterprises and individuals must take decisions
about how to route passengers or freight through the transport
system. This choice has been considerably expanded in the
context of the production of lighter and high value consuming
goods, such as electronics, and less bulky production techniques.
It is not uncommon for transport costs to account for
10% of the total cost of a product. This share also
roughly applies to personal mobility where households spend
about 10% of their income for transportation, including
the automobile which has a
complex cost structure.
Thus, the choice of a transportation mode to route people
and freight within origins and destinations becomes important
and depends on a number of factors such as the nature of
the goods, the available infrastructures, origins and destinations,
technology, and particularly their respective distances.
Jointly, they define transportation costs.

Transport costs are a monetary measure of what the
transport provider must pay to produce transportation
services. They come as
fixed (infrastructure)
and variable (operating) costs, depending on a variety
of conditions related to geography, infrastructure, administrative
barriers, energy, and on how passengers and freight are
carried. Three major components,
related to transactions, shipments and the friction of distance,
impact on transport costs.

Transport costs have significant impacts on the structure
of economic activities as well as on international trade.
Empirical evidence underlines that raising transport costs
by 10% reduces trade volumes by more than 20%. In a competitive
environment where transportation is a service that can be
bided on, transport costs are influenced by the respective
rates of transport companies, the portion of the
transport costs charged to users.

Rates are the price of transportation services paid
by their users. They are the negotiated monetary
cost of moving a passenger or a unit of freight between
a specific origin and destination. Rates are often visible
to the consumers since transport providers must provide
this information to secure transactions. They may not necessarily
express the real transport costs.

The difference between costs and rates either results in
a loss or a profit from the service provider. Considering
the components of transport costs previously discussed,
rate setting is a complex undertaking subject to constant
change. For public transit, rates are often fixed
and the result of a political decision where a share of
the total costs is subsidized by the society. The goal is
to provide an affordable mobility to the largest possible
segment of the population even if this implies a recurring
deficit (public transit systems rarely make any profit).
It is thus common for public transit systems to have rates
that are lower than costs. For freight transportation
and many forms of passenger transportation (e.g. air transportation)
rates are subject to a competitive pressure. This
means that the rate will be adjusted according to the demand
and the supply. They either reflect costs directly involved
with shipping (cost-of-service) or are determined by the
value of the commodity (value-of-service). Since many actors
involved in freight transportation are private rates tend
to vary, often significantly, but profitability is paramount.
2. Costs and Time Components
Transportation offers a
spectrum of costs and level of services, which results
in substantial differences
across the world. The price of a transport service does
not only include the direct out-of-the-pocket money costs
to the user but also includes time costs and costs related
to possible inefficiencies, discomfort and risk (e.g. unexpected
delays). However, economic actors often base their choice
of a transport mode or route on only part of the total transport
price. For example, motorists are biased by short run marginal
costs. They might narrow down the price of a specific trip
by car to fuel costs only, thereby excluding fixed costs
such as depreciation, insurance and vehicle tax. Many shippers
or freight forwarders are primarily guided by direct money
costs when considering the price factor in modal choice.
The narrow focus on direct money costs is to some extent
attributable to the fact that time costs and costs related
to possible inefficiencies are harder to calculate and often
can only be fully assessed after the cargo has arrived.
Among the most significant
conditions affecting
transport costs and thus transport rates are:

Geography. Its impacts mainly involve distance
and accessibility. Distance is commonly the most basic condition
affecting transport costs. The more it is difficult to trade
space for a cost, the more the
friction of distance is
important. It can be expressed in terms of length, time,
economic costs or the amount of energy used. It varies greatly
according to the type of transportation mode involved and
the efficiency of specific transport routes. Landlocked
countries tend to have higher transport costs, often twice
as much, as they do not have direct access to maritime transportation.
The impact of geography on the cost structure can be expanded
to include several rate
zones, such as one for local, another for the nation
and another for exports.

Type of product. Many products require packaging,
special handling, are bulky or perishable. Coal is obviously
a commodity that is easier to transport than fruits or fresh
flowers as it requires rudimentary storage facilities and
can be transshipped using rudimentary equipment. Insurance
costs are also to be considered and are commonly a function
of the value to weight
ratio and the risk associated with the movement. As
such, different economic
sectors incur different transport costs as they each
have their own transport intensity. With containerization
the type of product plays little in the transport cost since
rates are set per container, but products still need to
be loaded or unloaded from the container. For passengers,
comfort and amenities must be provided, especially if long
distance travel is involved.

Economies of scale. Another condition affecting
transport costs is related to economies of scale or the
possibilities to apply them as the larger the quantities
transported, the lower the unit cost. Bulk commodities such
as energy (coal, oil), minerals and grains are highly suitable
to obtain lower unit transport costs if they are transported
in large quantities. For instance, moving a barrel of oil
over 4,000 km would cost $1 on a 150,000 deadweight tons
tanker ship and $3 on a 50,000 deadweight tons tanker ship.
A similar trend also applies to container shipping with
larger containerships involving lower unit costs.

Energy. Transport activities are large consumers
of energy, especially oil. About 60% of all the global oil
consumption is attributed to transport activities. Transport
typically account for about 25% of all the energy consumption
of an economy. The costs of several energy intensive transport
modes, such as air transport, are particularly susceptible
to fluctuations in energy prices.

Trade imbalances. Imbalances between imports
and exports have impacts on transport costs. This is especially
the case for container transportation since trade imbalances
imply the repositioning of empty containers that have to
be taken into account in the total transport costs. Consequently,
if a trade balance is strongly negative (more imports than
exports), transport costs for imports tend to be higher
than for exports. Significant
transport rate imbalances
have emerged along major trade routes. The same condition
applies at the national and local levels where freight flows
are often unidirectional, implying empty backhaul movements.

Infrastructures. The efficiency and capacity
of transport modes and terminals has a direct impact on
transport costs. Poor infrastructures imply higher transport
costs, delays and negative economic consequences. More developed
transport systems tend to have lower transport costs since
they are more reliable and can handle more movements.

Competition and regulation. Concerns the complex
competitive and regulatory environment in which transportation
takes place. Transport services taking place over highly
competitive segments tend to be of lower cost than on segments
with limited competition (oligopoly or monopoly). International
competition has favored concentration in many segments of
the transport industry, namely maritime and air modes. Regulations,
such as tariffs, cabotage laws, labor, security and safety
impose additional transport costs, particularly in
developing countries.

Surcharges. Refer to an array of fees,
often set in an arbitrary fashion, to reflect temporary
conditions that may impact on costs assumed by the transporter.
The most common are fuel surcharges, security fees, geopolitical
risk premiums and additional baggage fees. The passenger
transport industry, particularly airlines, has become dependent
on a wide array of surcharges as a source of revenue.

The transport time component
is also an important consideration as it is associated with
the service factor of transportation. They include the transport
time, the order time, the timing, the punctuality and the
frequency. For instance, a maritime shipping company may
offer a container transport service between a number of
North American and Pacific Asian ports. It may take 12 days
to service two ports across the Pacific (transport time)
and a port call is done every two days (frequency). In order
to secure a slot on a ship, a freight forwarder must call
at least five days in advance (order time). For a specific
port terminal, a ship arrives at 8AM and leaves at 5PM (timing)
with the average delay being six hours (punctuality).
3. Types of Transport Costs
Mobility is influenced by transport costs. Empirical evidence
for passenger vehicle use underlines the
relationship between annual vehicle
mileage and fuel costs, implying the higher fuel costs
are, the lower the mileage. At the international level,
doubling of transport costs can reduce trade flows by more
than 80%. The more affordable mobility is, the more frequent
the movements and the more likely they will take place over
longer distances. Empirical evidence also underlines that
transport costs tend to be higher in the early or final
stages of a movement, also known as the
first and the last
mile. A wide variety of transport costs can be considered.

Terminal
costs. Costs that are related to the loading, transshipment
and unloading. Two major terminal costs can be considered;
loading and unloading at the origin and destination, which
are unavoidable, and intermediate (transshipment) costs
that can be avoided. For complex transport terminals, such
as ports and airports,
terminal costs can involve a wide array of components.

Linehaul
costs. Costs that are a function of the distance
over which a unit of freight or passenger is carried. Weight
is also a cost function when freight is involved. They include
labor and fuel and commonly exclude transshipment costs.

Capital costs. Costs applying to the physical assets
of transportation mainly infrastructures, terminals and
vehicles. They include the purchase or major enhancement
of fixed assets, which can often be a one-time event. Since
physical assets tend to depreciate over time, capital investments
are required on a regular basis for maintenance.

Transport providers make a variety of decisions based on
their cost structure, a function of all the above types
of transport costs. To simplify transactions and clearly
identify the respective responsibilities specific
commercial transportation terms
have been set. While the transport price plays an important
role in modal choice, firms using freight transport services
are not always motivated by notions of cost minimization.
They often show "satisficing behavior" whereby the transport
costs need to be below a certain threshold combined with
specific requirements regarding reliability, frequency and
other service attributes. Such complexities make it more
difficult to clearly assess the role of transport price
in the behavior of transport users. The role of transport
companies has sensibly increased in the general context
of the global commercial geography. However, the nature
of this role is changing as a result of a general reduction
of transport costs but growing infrastructure costs, mainly
due to greater flows and competition for land. Each transport
sector must consider
variations in the
importance of different transport costs. While operating
costs are high for air transport, terminal costs are significant
for maritime transport. Several indexes, such as the
Baltic Dry Index, have been developed
to convey a pricing mechanism useful for planning and decision
making.
Technological changes and their associated decline in transport
costs have weakened the links transport modes and their
terminals. There is less emphasis on heavy industries and
more importance given to manufacturing and transport services
(e.g. warehousing and distribution). Indeed, new functions
are being grafted to transport activities that are henceforward
facilitating logistics and manufacturing processes.
Relations between terminal operators and carriers have thus
become crucial notably in containerized traffic. They are
needed to overcome the physical and time constraints of
transshipment, notably at ports.
The requirements of international trade gave rise to the
development of specialized and intermediary firms
providing transport services. These are firms that do not
physically transport the goods, but are required to facilitate
the grouping, storage and handling of freight as well as
the complex paperwork and financial and legal transactions
involved in international trade. Examples include freight
forwarders, customs brokers, warehousing, insurance agents
and banking, etc. Recently, there has been a trend to
consolidate these different intermediate functions,
and a growing proportion of global trade is now being organized
by multi-national corporations that are offering door to
door logistics services. They are defined as third party
logistics providers.

Media
Household Expenditures on Transport, United States Fixed
and Operating Transport Costs
Components of Transport Cost
Freight Transportation Service Spectrum Conditions
Affecting Transport Costs
Friction of Distance Functions
Different Components of Transport Time
Distance, Modal Choice and Transport Costs
Freight Transport Costs per Ton-Mile
Cost / Performance Relationships for Inland Freight Transportation
Modes
Top 10 Commodity Groups Ranked by Value Per Ton, United
States, 2002 Shipment
Size and Transport Costs
Maritime Freight Rates (USD per TEU)
Maritime Transportation Rates for a 40 Foot Container between
Selected Ports, 2010 Transport
Costs by Industry Type, 1999
Daily Operating Expenses for Containerships per TEU
Average Cost per TEU by Containership Capacity and By Route
Freight Rates in TEU Between Singapore and Rotterdam
Selected International Commercial Terms (Incoterms)
Zonal Transport Rates
First and Last Mile Unit Cost Structure
Terminal Costs
Retail Gasoline Prices and Annual Vehicle Mileage, United
States
Time and Cost of Transport Activities Involving Moving a
40 Foot Container between the American East Coast and Western
Europe Typical
Ocean Freight Costs for some Products (Asia – United States
or Asia – Europe) Container
Shipping Costs and Cargo Value
Cumulative Cost and Time of Moving a 40 Foot Container between
the American East Coast and Western Europe
Port Cost Components and Total Port Pricing per TEU
Cost to Import a 20 Foot Container
Logistics Costs and Average Transit Time of a 20 Foot Container,
Mombasa – Nairobi (Kenya) Fixed
and Variable Costs and Service in the Transportation System
The Baltic Dry Index